Finance Essay

5200 Words Nov 30th, 2013 21 Pages
P6-38 (30 minutes) a. Best Buy (a retailer) reports a much higher receivables turnover rate than does the manufacturer, Caterpillar. The likely reason for this is that retail sales are usually via cash, check, or credit cards (which are like cash for the retailers). Recall that the turnover ratio includes credit sales, but, because most firms do not report credit sales, we are forced to use total sales when we calculate the turnover ratio. Using total sales instead of credit sales overstates the turnover ratio. Manufacturers, on the other hand, usually sell to retailers on credit and the accounts are not collected for a much longer period of time. CAT has a finance subsidiary that provides loan and lease financing. The longer …show more content…
P6-38 (continued)

d. The relative asset turnover rates reported generally conform to our expectations across industries. Those industries that sell on credit, rather than using credit cards, or that normally stock inventories for production and sale, or that require substantial investment in long-term assets yield much lower receivable, inventory, and PPE turnover rates respectively. These lower turnover rates must be accompanied by higher profit margins and/or higher financial leverage to yield a satisfactory return on net operating assets. Generally, we expect the following:

Industry | Receivables Turnover | Inventory Turnover | PPE Turnover | Retailing | ↑ | ↑ | ↑ | Manufacturing | ↓ | ↓ | ↓ |

P6-41 (45 minutes)

($ millions)

a. Dow uses LIFO inventory costing for 29% of inventories at December 31, 2010. As of 2010, the LIFO inventory reserve is $1,003 million. Thus, cumulatively, pretax income has been reduced by $1,003 million because Dow uses LIFO. Assuming a tax rate of 35%, Dow has saved taxes of $351.05 million ($1,003 million × 35%), cumulatively. During 2010, the LIFO reserve increased by $185 million ($1,003 million - $818 million), saving the company $64.75 million ($185 million × 35%) in taxes in 2010. This tax saving increased operating cash flow by that same amount. b. The inventory turnover for 2010 is 6.57 (computed as). The average inventory days outstanding

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